Red Cat Holdings, Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2025 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission File Number: 001-40202 Red Cat Holdings, Inc. (Exact name of registrant as specified in its charter) Nevada 88-0490034 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 15 Ave. Munoz Rivera , Ste 2200 San Juan , PR 00901 (Address of principal executive offices) (Zip Code) (800) 466-9152 (Registrant’s telephone number, including area code) Not applicable (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common stock, par value $0.001 RCAT The Nasdaq Stock Market LLC Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of May 12, 2025, there were 90,915,265 shares of the registrant’s common stock outstanding. TABLE OF CONTENTS Page PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements 3 Condensed Consolidated Balance Sheets as of March 31, 2025 (Unaudited) and December 31, 2024 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2025 and 2024 (Unaudited) 4 Condensed Consolidated Statements Stockholders’ Equity for the Three Months Ended March 31, 2025 and 2024 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2025 and 2024 (Unaudited) 6 Notes to Unaudited Condensed Consolidated Financial Statements 7 ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 29 ITEM 4. Controls and Procedures 29 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 31 ITEM 1A. Risk Factors 31 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 31 ITEM 3. Defaults Upon Senior Securities 32 ITEM 4. Mine Safety Disclosures 32 ITEM 5. Other Information 32 ITEM 6. Exhibits 32 SIGNATURES 33 CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA This Quarterly Report on Form 10-Q contains certain forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “believes,” “will,” “expects,” “anticipates,” “estimates,” “predicts,” “potential,” “continues,” “intends,” “plans” and “would” or the negative of these terms or other comparable terminology. For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, and plans are all forward-looking statements. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding: ● the market and sales success of our existing and any new products; ● our ability to raise capital when needed and on acceptable terms; ● our ability to make acquisitions and integrate acquired businesses into our company; ● our ability to attract and retain management; ● the intensity of competition; ● changes in the political and regulatory environment and in business and economic conditions in the United States and globally; ● changes in macroeconomic conditions, including inflation, interest rates, and geopolitical conflicts; ● the imposition or increase of tariffs and other trade barriers that could impact the cost of raw materials, components, and finished goods; ● delays or disruptions in our supply chain due to global trade restrictions or political instability; and ● fluctuations in customer demand in response to broader economic conditions; All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources. Given these uncertainties, readers of this Quarterly Report on Form 10-Q are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. All references in this Quarterly Report on Form 10-Q to the “Company”, “we”, “us”, or “our”, are to Red Cat Holdings, Inc., a Nevada corporation, including its wholly owned consolidated subsidiaries, which include Skypersonic, Inc. (“Skypersonic”), Teal Drones, Inc. (“Teal”), Red Cat Propware, Inc. (“Propware”), FW Acquisition, Inc. (“FlightWave”) beginning on September 5, 2024 , UAVPatent Corp., as well as Rotor Riot LLC (“Rotor Riot”), Fat Shark Holdings, Ltd. (“Fat Shark”), which were wholly owned subsidiaries until February 16, 2024. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS RED CAT HOLDINGS, INC. Condensed Consolidated Balance Sheets (Unaudited) March 31, 2025 December 31, 2024 ASSETS Current assets Cash $ 7,722,410 $ 9,154,297 Accounts receivable, net 1,554,295 489,316 Inventory 13,854,548 12,950,941 Prepaid inventory 3,253,312 641,959 Prepaid expenses and other 3,027,923 2,561,744 Total current assets 29,412,488 25,798,257 Goodwill 17,671,065 17,671,065 Intangible assets, net 8,047,385 8,453,068 Property and equipment, net 1,971,940 1,880,709 Other 363,054 309,823 Operating lease right-of-use assets 2,189,916 1,491,345 Total long-term assets 30,243,360 29,806,010 TOTAL ASSETS $ 59,655,848 $ 55,604,267 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 1,518,980 $ 2,049,519 Accrued expenses 1,193,353 1,240,115 Debt obligations - short term 350,000 350,000 Customer deposits 220,517 227,484 Operating lease liabilities 490,966 311,532 Convertible notes payable - short term 25,132,556 — Total current liabilities 28,906,372 4,178,650 Operating lease liabilities 1,838,228 1,306,064 Total long-term liabilities 1,838,228 1,306,064 Total liabilities 30,744,600 5,484,714 Commitments and contingencies (Note 18) - - Stockholders’ equity Series B preferred stock - shares authorized 4,300,000 ; issued and outstanding 4,676 and 4,676 47 47 Common stock - shares authorized 500,000,000 ; issued and outstanding 85,647,618 and 85,215,136 85,648 85,215 Additional paid-in capital 176,693,607 174,778,994 Accumulated deficit ( 147,868,054 ) ( 124,744,703 ) Total stockholders’ equity 28,911,248 50,119,553 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 59,655,848 $ 55,604,267 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 RED CAT HOLDINGS, INC. Condensed Consolidated Statements of Operations (Unaudited) 2025 2024 Three months ended March 31, 2025 2024 Revenues $ 1,629,662 $ 6,614,029 Cost of goods sold 2,480,072 5,492,825 Gross (loss) profit ( 850,410 ) 1,121,204 Operating Expenses Research and development 3,432,593 2,669,502 Sales and marketing 3,314,748 1,410,506 General and administrative 4,880,448 3,084,495 Total operating expenses 11,627,789 7,164,503 Operating loss ( 12,478,199 ) ( 6,043,299 ) Other (income) expense Convertible notes payable fair value adjustment 10,699,677 — Interest (income) expense, net ( 54,525 ) 12,488 Gain on divestiture of consumer segment — ( 9,642,428 ) Impairment on equity method investment — 9,058,875 Equity method loss — 503,625 Investment income, net — ( 77,254 ) Other, net — ( 490,982 ) Other expense (income) 10,645,152 ( 635,676 ) Net loss from continuing operations ( 23,123,351 ) ( 5,407,623 ) Loss from discontinued operations — ( 1,373,457 ) Net loss $ ( 23,123,351 ) $ ( 6,781,080 ) Loss per share - basic and diluted Continuing operations $ ( 0.27 ) $ ( 0.07 ) Discontinued operations — ( 0.02 ) Loss per share - basic and diluted $ ( 0.27 ) $ ( 0.09 ) Weighted average shares outstanding - basic and diluted 85,505,520 74,204,622 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 RED CAT HOLDINGS, INC. Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) Shares Amount Shares Amount Capital Deficit Income (Loss) Equity Series B Additional Accumulated Other Preferred Stock Common Stock Paid-in Accumulated Comprehensive Total Shares Amount Shares Amount Capital Deficit Income (Loss) Equity Balances, December 31, 2023 4,676 $ 47 74,166,262 $ 74,166 $ 123,125,007 $ ( 71,434,754 ) $ 4,621 $ 51,769,087 Stock based compensation — — — — 805,634 — — 805,634 Vesting of restricted stock units — — 116,247 116 ( 9,767 ) — — ( 9,651 ) Net loss — — — — — ( 6,781,080 ) — ( 6,781,080 ) Balances, March 31, 2024 4,676 $ 47 74,282,509 $ 74,282 $ 123,920,874 $ ( 78,215,834 ) $ 4,621 $ 45,783,990 Balances, December 31, 2024 4,676 $ 47 85,215,136 $ 85,215 $ 174,778,994 $ ( 124,744,703 ) $ — $ 50,119,553 Balances 4,676 $ 47 85,215,136 $ 85,215 $ 174,778,994 $ ( 124,744,703 ) $ — $ 50,119,553 Stock based compensation — — — — 1,598,972 — — 1,598,972 Exercise of warrants — — 49,843 50 ( 50 ) — — — Exercise of stock options — — 488,969 489 315,585 — — 316,074 Retirement of common shares — — ( 106,330 ) ( 106 ) 106 — — — Net loss — — — — — ( 23,123,351 ) — ( 23,123,351 ) Balances, March 31, 2025 4,676 $ 47 85,647,618 $ 85,648 $ 176,693,607 $ ( 147,868,054 ) $ — $ 28,911,248 Balances 4,676 $ 47 85,647,618 $ 85,648 $ 176,693,607 $ ( 147,868,054 ) $ — $ 28,911,248 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 RED CAT HOLDINGS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) 2025 2024 Three months ended March 31, 2025 2024 Cash Flows from Operating Activities Net loss $ ( 23,123,351 ) $ ( 6,781,080 ) Net loss from discontinued operations — ( 1,373,457 ) Net loss from continuing operations ( 23,123,351 ) ( 5,407,623 ) Adjustments to reconcile net loss to net cash used in operations: Stock based compensation - options 804,855 708,726 Stock based compensation - restricted stock units 794,117 96,908 Amortization of intangible assets 405,683 208,539 Depreciation 181,872 205,085 Payments of taxes related to equity transactions — ( 9,651 ) Gain on divestiture of consumer segment — ( 9,642,428 ) Impairment on equity method investment — 9,058,875 Equity method loss — 503,625 Convertible note payable fair value adjustment 10,699,677 — Changes in operating assets and liabilities Accounts receivable ( 1,064,979 ) ( 1,127,353 ) Inventory ( 903,607 ) 2,824,184 Prepaid inventory ( 2,611,353 ) 704,218 Prepaid expenses and other ( 519,410 ) ( 1,828,179 ) Operating lease right-of-use assets and liabilities 13,027 4,551 Customer deposits ( 6,967 ) 3,746 Accounts payable ( 530,539 ) ( 700,235 ) Accrued expenses ( 46,762 ) 21,752 Net cash used in operating activities of continuing operations ( 15,907,737 ) ( 4,375,260 ) Cash Flows from Investing Activities Proceeds from divestiture of consumer segment — 1,000,000 Purchases of property and equipment ( 273,103 ) ( 75,991 ) Net cash (used in) provided by investing activities of continuing operations ( 273,103 ) 924,009 Cash Flows from Financing Activities Proceeds from issuance of convertible notes payable, net of issuance costs 14,432,879 — Payments under debt obligations — ( 147,147 ) Proceeds from exercise of stock options 316,074 — Net cash provided by (used in) financing activities of continuing operations 14,748,953 ( 147,147 ) Discontinued operations Operating activities — ( 74,556 ) Investing activities — — Financing activities — ( 120,413 ) Net cash used in discontinued operations — ( 194,969 ) Net decrease in Cash ( 1,431,887 ) ( 3,793,367 ) Cash, beginning of period 9,154,297 10,245,064 Cash, end of period $ 7,722,410 $ 6,451,697 Cash paid for interest $ — $ 13,432 Cash paid for income taxes $ — $ — Non-cash transactions Equity method investment from divestiture of consumer segment $ — $ 17,000,000 Note receivable from divestiture of consumer segment $ — $ 4,000,000 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 RED CAT HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 – The Business Red Cat Holdings, Inc. (the “Company”) was originally incorporated in February 1984. The Company is a drone technology company integrating robotic hardware and software for military, government and commercial operation. Since April 2016, the Company’s primary business has been to provide products, services, and solutions to the drone industry. Beginning in January 2020, the Company expanded the scope of its drone products and services through five acquisitions, including: A. In January 2020, the Company acquired Rotor Riot, a provider of First Person View (“FPV”) drones and equipment, primarily to consumers. The purchase price was $ 1,995,114 . Rotor Riot was sold in February 2024 to Unusual Machines. B. In November 2020, the Company acquired Fat Shark Holdings, Ltd. (“Fat Shark”), a provider of FPV video goggles to the drone industry. The purchase price was $ 8,354,076 . Fat Shark was sold in February 2024 to Unusual Machines. C. In May 2021, the Company acquired Skypersonic which provided hardware and software solutions that enable drones to complete inspection services in locations where GPS is either denied or not available, yet still record and transmit data even while being operated from thousands of miles away. The purchase price was $ 2,791,012 . Skypersonic’s technology has been redirected to military applications and its operations consolidated into Teal. D. In August 2021, the Company acquired Teal Drones, Inc. (“Teal”), a leader in commercial and government Unmanned Aerial Vehicles (“UAV”) technology. The purchase price was $ 10,011,279 . E. In September 2024, the Company acquired FlightWave Aerospace Systems Corporation, an industry-leading provider of VTOL drone, sensor and software solutions, under an Asset Purchase Agreement (the “APA”). As part of the acquisition, the Company created a new subsidiary, FW Acquisition Inc. (“FlightWave”) for ongoing operations. The purchase price was $ 14,000,000 . See Note 3 for additional information. Note 2 – Summary of Significant Accounting Policies Basis of Presentation – The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three months ended March 31, 2025 are not necessarily indicative of the results for the full year. For further information, refer to the consolidated financial statements and footnotes thereto for the eight month transition period ended December 31, 2024, included in the Company’s Transition Report on Form 10-KT. 7 Principles of Consolidation – Our condensed consolidated financial statements include the accounts of our wholly owned subsidiaries which include Teal, FlightWave (beginning on September 5, 2024), Skypersonic, as well as Rotor Riot and Fat Shark through the sale date of February 16, 2024. Non-majority owned investments, including the formerly wholly owned subsidiaries Rotor Riot and Fat Shark, were accounted for using the equity method when the Company was able to significantly influence the operating policies of the investee. Intercompany transactions and balances have been eliminated. The Consumer segment businesses are characterized as discontinued operations in these financial statements. The operating results and cash flows of discontinued operations are separately stated in those respective financial statements. See Note 4. Use of Estimates – The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in these financial statements include those used to (i) complete purchase price accounting for acquisitions, (ii) the evaluation of long-term assets, including goodwill, for impairment, (iii) the evaluation of other-than-temporary-impairment of equity method investments, and (iv) valuations of convertible notes payable. Concentration of Credit Risk – Financial instruments, which potentially subject the Company to concentrations of credit risk, include trade receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company performs ongoing credit evaluations of its customers, generally does not require collateral and considers the credit risk profile of the customer from which the receivable is due in further evaluating collection risk. Customers that accounted for 10% or greater of accounts receivable, net as of March 31, 2025 and December 31, 2024 were as follows: 8 Schedules of Concentration of Credit Risk March 31, 2025 December 31, 2024 Customer A 33 % - * Customer B 27 % - * Customer C 17 % - * Customer D - * 36 % Customer E - * 17 % Customer F - * 15 % Concentration risk percentage - * 15 % * Accounts Receivable was less than 10% During the three months ended March 31, 2025, three customers accounted for equal to or greater than 10% of total revenue, totaling 31 % 26 % and 17 %, respectively. During the three months ended March 31, 2024, three customers accounted for equal to or greater than 10% of total revenue, totaling 33 % 22 % and 20 %, respectively. The Company does not believe the loss of one or more of these customers would be significant to operations. Fair Values, Inputs and Valuation Techniques for Financial Assets and Liabilities, and Related Disclosures – The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The guidance establishes three levels of the fair value hierarchy as follows: Level 1 : Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date; Level 2 : Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and Level 3 : Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data. The Company’s financial instruments mainly consist of cash, accounts receivable, current assets, accounts payable, accrued expenses, notes payable, and convertible notes payable. The recorded carrying amounts of cash, accounts receivable, current assets, accounts payable, accrued expenses, and notes payable are considered to approximate their estimated fair values due to their short-term nature. Liabilities recognized at fair value on a recurring basis in the consolidated balance sheets consist of convertible notes payable. These items are categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is defined as the price that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. 9 The following table summarizes the Company’s financial instruments at fair value based on the fair value hierarchy for each class of instrument: Schedules of financial instruments fair value hierarchy Level 1 Level 2 Level 3 Total Convertible notes payable $ — $ — $ 25,132,556 $ 25,132,556 Convertible Notes Payable The Company measures its convertible notes payable at fair value based on significant inputs not observable in the market, which caused them to be classified as Level 3 measurements within the fair value hierarchy. Changes in the fair value of the convertible notes payable related to updated assumptions and estimates were recognized as a convertible notes payable fair value adjustment within the consolidated statements of operations and comprehensive loss. In determining the fair value of the convertible notes payable as of March 31, 2025, the Company used a market-based approach. The valuation method utilized a negotiated discount rate and a market yield rate which are unobservable inputs. An increase or decrease in any of the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value. The Company calculated the estimated fair value of the convertible notes payable as of March 31, 2025 using the following assumptions: Schedules of Fair Value, Net Derivative Asset (Liability) Measured on Recurring Basis, Unobservable Input Reconciliation Issuance date 2/10/2025 Maturity date 2/10/2026 Stock price 5.88 Expected volatility factor 124.8 % Risk-free interest rate 4.08 % The following table presents changes in the Level 3 convertible notes payable measured at fair value for the three months ended March 31, 2025: Schedules of Changes in Convertible Notes Payable Measured at Fair Value Balance, January 1, 2025 $ — Balance $ — Additions 14,432,879 Fair value measurement adjustments 10,699,677 Balance, March 31, 2025 $ 25,132,556 Balance $ 25,132,556 Warrants The fair value of the warrants issued during the three months ended March 31, 2025 was estimated using a Monte Carlo simulation model. The significant unobservable inputs for the Monte Carlo model include the stock price, exercise price, risk-free rate of return, time to expiration, and the volatility. An increase or decrease in the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value. Additionally, if certain provisions are triggered, reset adjustments may be required in the future. For the three months ended March 31, 2025, no value was assigned to the warrants due to the fair market value of the convertible note payable being in excess of the proceeds received. Revenue Recognition – The Company recognizes revenue in accordance with ASC Topic 606 - Revenue from Contracts with Customers, issued by the Financial Accounting Standards Board. This standard includes a comprehensive evaluation of factors to be considered regarding revenue recognition including (i) identifying the promised goods, (ii) evaluating performance obligations, (iii) measuring the transaction price, (iv) allocating the transaction price to the performance obligations if there are multiple components, and (v) recognizing revenue as each obligation is satisfied. The Company’s revenue transactions include the shipment of goods to customers as orders are fulfilled, completion of non-recurring engineering, completion of training, and customer support services. The Company recognizes revenue upon shipment of product or prototypes unless otherwise specified in the purchase order or contract. Customer deposits totaled $ 220,517 and $ 227,484 at March 31, 2025 and December 31, 2024, respectively. 10 The following table presents the Company’s revenue disaggregated by revenue type: Schedules of Revenue Disaggregated by Revenue Type 2025 2024 Three months ended March 31, 2025 2024 Product related $ 1,629,662 $ 6,614,029 Contract related — — Total $ 1,629,662 $ 6,614,029 Product Warranty - The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. Product warranty reserves are recorded in current liabilities under accrued expenses. Warranty liability was $ 642,401 and $ 661,357 as of March 31, 2025 and December 31, 2024 respectively. Recent Accounting Pronouncements – Management does not believe that recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements. Basic and Diluted Net Loss per Share – Basic and diluted net loss per share has been calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Common stock equivalents were excluded from the computation of diluted net loss per share of common stock because they were anti-dilutive. The conversion or exercise of these common stock equivalents would dilute earnings per share if we become profitable in the future. Outstanding securities not included in the computation of diluted net loss per share because their effect would have been anti-dilutive include: Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share March 31, 2025 December 31, 2024 Series B Preferred Stock, as converted 3,896 3,896 Stock options 5,011,820 5,242,308 Warrants 1,831,433 914,056 Restricted stock 1,272,599 1,544,027 Total 8,119,748 7,704,287 Related Parties – Parties are considered to be related to us if they have control or significant influence, directly or indirectly, over us, including key management personnel and members of the Board of Directors or are direct relatives of key management personnel of members of the Board of Directors. Related Party transactions are disclosed in Note 18. Liquidity and Going Concern – The Company has never been profitable and has incurred net losses related to acquisitions, as well as costs incurred to pursue its long-term growth strategy. During the three months ended March 31, 2025, the Company incurred a net loss of $ 23,123,351 and used cash in operating activities of $ 15,907,737 . As of March 31, 2025, working capital totaled $ 506,116 . These financial results and our financial position at March 31, 2025 raise substantial doubt about our ability to continue as a going concern. The Company has recently taken actions to strengthen its liquidity through additional financings. Additionally, in November 2024, the Company was selected as the winner of the U.S. Army’s Short Range Reconnaissance (SRR) Program of Record which the Company is currently in negotiations regarding the initial purchase. The Company is currently in the process of scaling our production manufacturing facility in order to increase revenue and improve gross margins in hopes to increase cash flows from operations. As described in Note 12, the Company closed financings with proceeds of $ 7,681,000 , $ 5,775,000 , $ 14,432,880 in September 2024, November 2024, and February 2025, respectively. Additionally, the Company’s Form S-3 became effective on December 11, 2024 and as described in Note 19, on April 10, 2025, the Company raised an additional $ 30 million. Management has concluded that these recent positive developments alleviate any substantial doubt about our ability to continue our operations, and meet our financial obligations, for twelve months from the date these consolidated financial statements are issued. 11 Note 3 – Business Combination On September 4, 2024, the Company entered into the APA with FlightWave Aerospace Systems Corporation (the “Seller”) to broaden the Company’s range of drone products. The seller sold certain assets used in designing, developing, manufacturing, and selling long range, AI-powered UAVs for commercial use. Pursuant to the APA, the Company has acquired substantially all of the assets owned, controlled or used by the Seller for an aggregate purchase price of $ 14,000,000 worth of shares of the Company’s common stock, and as such, the asset purchase will be treated as a business combination. The purchase price is payable as follows: ● $ 7 million worth of the Company’s common stock issued on September 30, 2024, totaling 2,544,991 shares, equal to the VWAP on such date. ● $ 7 million worth of the Company’s common stock issued on December 31, 2024, totaling 819,830 shares, equal to the VWAP on such date. Goodwill for FlightWave is ascribed to existing relationships with several U.S. government agencies including classification as approved vendors. The Company has reported net losses since its inception and is presently unable to determine when and if the tax benefit of this deduction will be realized. The summary of the purchase price and its related allocation at fair market value is as follows: Schedule of Business Acquisitions of Purchase Price at Fair Market Value Shares issued $ 14,000,000 Total Purchase Price $ 14,000,000 Assets acquired Inventory $ 297,630 Operating lease right-of-use assets 128,433 Other assets 69,480 Brand name 567,000 Backlog 276,000 Customer relationships 900,000 Proprietary technology 3,705,000 Goodwill 8,675,565 Total assets acquired 14,619,108 Liabilities assumed Accounts payable and accrued expenses 264,493 Customer deposits 196,476 Operating lease liabilities 158,139 Total liabilities assumed 619,108 Total fair value of net assets acquired $ 14,000,000 Brand name, backlog, customer relationships and proprietary technology are included in intangible assets on the consolidated balance sheets. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end for impairment. Customer relationships and proprietary technology are being amortized over seven years. Backlog is being amortized over two years. The excess of the purchase price above the net assets acquired was recorded as goodwill which is reviewed quarterly and formally evaluated at year end. 12 Supplemental Unaudited Pro Forma Financial Information The following unaudited pro forma financial information summarizes the results of operations for the Company as though the Business Combination had occurred on January 1, 2024. The unaudited pro forma financial information has been presented for illustrative purposes only and is not necessarily indicative of results of operations that would have been achieved had the acquisition taken place on the date indicated, or the future consolidated results of operations of the Company. Schedule of Business Acquisitions of Pro Forma Information Three months ended March 31, 2024 Consolidated Revenues $ 6,736,179 Net Loss ( 7,404,880 ) Loss per share – basic and diluted ( 0.10 ) Note 4 – Divestiture of Consumer Segment On February 16, 2024, the Company closed the sale of Rotor Riot and Fat Shark to Unusual Machines. The sale was conducted pursuant to a Share Purchase Agreement dated November 21, 2022, as amended on April 13, 2023, July 10, 2023, and December 11, 2023 (the “SPA”). The transaction closed concurrently with UMAC’s initial public offering and listing on the NYSE American exchange (“IPO”) under the symbol “UMAC.” The total consideration received by the Company was valued at $ 20 million and consisted of i) $ 1 million in cash, ii) $ 2 million in a secured promissory note (“Promissory Note”), iii) $ 17 million in securities of Unusual Machines, and iv) a post-closing adjustment for excess working capital. Secured Promissory Note The Promissory Note from Unusual Machines bore interest at a rate of 8 % per year, was due 18 months from the date of issue, and required monthly payments of interest due in arrears on the 15th day of each month. Unusual Machines Securities The $ 17 million worth of UMAC common stock was valued at the IPO price for UMAC’s common stock of $ 4.00 per share, resulting in 4,250,000 shares of UMAC common stock being issued to the Company (representing approximately 49% of UMAC’s issued and outstanding common stock after giving effect to the IPO and to the issuance of common stock to the Company upon closing of the IPO). Working Capital The purchase price was adjusted for working capital as of the closing date. Actual working capital excess amounts increased the principal amount of the Promissory Note dollar for dollar. Working capital as of closing was finalized at $ 2 million in July 2024. As a result, UMAC issued the Company $ 4,000,000 of its 8 % Promissory Notes due November 30, 2025 reflecting (i) satisfaction and settlement of working capital adjustments and (ii) a maturity date extension to November 30, 2025. 13 The Consumer segment has been classified as Discontinued Operations and reported in accordance with the applicable accounting standards. Set forth below are the results of operations for the Consumer segment for: Schedule of Discontinued Operations of Consumer Segment 2025 2024 Three months ended March 31, 2025 2024 Revenues $ — $ 494,737 Cost of goods sold — 1,407,760 Gross loss — ( 913,023 ) Operating Expenses Research and development — 13,389 Sales and marketing — 278,078 General and administrative — 168,967 Total operating expenses — 460,434 Operating loss — ( 1,373,457 ) Net loss from discontinued operations $ — $ ( 1,373,457 ) Note 5 – Inventories Inventories consisted of the following: Schedule of Inventories March 31, 2025 December 31, 2024 Raw materials $ 10,135,853 $ 8,421,036 Work-in-process 804,589 898,635 Finished goods 2,914,106 3,631,270 Total $ 13,854,548 $ 12,950,941 Note 6 – Intangible Assets Intangible assets relate to acquisitions completed by the Company, including those described in Note 1, and were as follows: Schedule of Intangible Assets March 31, 2025 December 31, 2024 Gross Value Accumulated Amortization Net Value Gross Value Accumulated Amortization Net Value Proprietary technology $ 7,987,001 $ ( 2,949,974 ) $ 5,037,027 $ 7,987,001 $ ( 2,640,323 ) $ 5,346,678 Backlog 276,000 ( 80,499 ) 195,501 276,000 ( 16,610 ) 259,390 Customer relationships 900,000 ( 82,143 ) 817,857 900,000 ( 50,000 ) 850,000 Non-compete agreements 65,000 ( 65,000 ) — 65,000 ( 65,000 ) — Total finite-lived assets 9,228,001 ( 3,177,616 ) 6,050,385 9,228,001 ( 2,771,933 ) 6,456,068 Brand name 1,997,000 — 1,997,000 1,997,000 — 1,997,000 Total indefinite-lived assets 1,997,000 — 1,997,000 1,997,000 — 1,997,000 Total intangible assets, net $ 11,225,001 $ ( 3,177,616 ) $ 8,047,385 $ 11,225,001 $ ( 2,771,933 ) $ 8,453,068 Proprietary technology and customer relationships are being amortized over seven years . Non-compete agreements are being amortized over three years . Backlog is being amortized over two years. Brand name is not amortized but reviewed for impairment on a quarterly basis and formally evaluated at year end. 14 Note 7 – Equity Method Investment On July 22, 2024, the Company sold all of its securities in UMAC to two unaffiliated third-party purchasers (the “Purchasers”). As part of the transaction, on July 22, 2024, the Company entered into an Exchange Agreement with UMAC pursuant to which the Company exchanged 4,250,000 shares of UMAC’s common stock, par value $ 0.001 per share, for 4,250 shares of UMAC’s newly designated Series A Convertible Preferred Stock (the “Series A”). The Company sold the Series A ownership interest ($ 4,408,357 at time of sale) and the Note Receivable of $ 4,000,000 to the Purchasers for $ 4.4 million in cash pursuant to a Purchase Agreement in a transaction that closed on July 22, 2024. As of March 31, 2024, the Company had owned approximately a 46 % interest in Unusual Machines. The primary business operations included selling first-person-view video goggles for drone pilots, drones, parts and related equipment to the consumer marketplace. UMAC’s financial statements are prepared in accordance with GAAP. See Note 4 for additional information. Financial information for UMAC prior to the sale of the Company’s equity interest was derived from UMAC’s Form 10-Q for the six months ended June 30, 2024 and was as follows: Schedule of Quarterly Financial Information Current assets $ 5,116,963 Long-term assets 20,083,390 Current liabilities 931,200 Long-term liabilities 4,297,332 Revenues 2,030,039 Gross profit 592,607 Net loss $ ( 2,718,240 ) The Company’s investments in UMAC have been impacted by the following: Schedule of investments Initial investment, February 16, 2024 $ 17,000,000 Equity method loss ( 503,625 ) Impairment ( 9,058,875 ) Investment balance, March 31, 2024 $ 7,437,500 Investment balance $ 7,437,500 Impairment ( 2,295,000 ) Equity method loss ( 734,143 ) Sale of ownership interest ( 4,408,357 ) Investment balance, July 22, 2024 $ — Investment balance $ — The computation of both the initial investment as of February 16, 2024 and investment balance as of March 31, 2024, was based on the fair market value of UMAC’s common stock. 15 Note 8 – Property and Equipment Property and equipment consist of assets with an estimated useful life greater than one year and are reported net of accumulated depreciation. The reported values are periodically assessed for impairment, and were as follows: Schedule of Property and Equipment March 31, 2025 December 31, 2024 Equipment and related $ 1,737,006 $ 1,633,105 Leasehold improvements 1,556,139 1,556,139 Furniture and fixtures 395,667 226,465 Accumulated depreciation ( 1,716,872 ) ( 1,535,000 ) Net carrying value $ 1,971,940 $ 1,880,709 Depreciation expense totaled $ 181,872 and $ 205,085 for the three months ended March 31, 2025 and 2024, respectively. Note 9 – Other Long-Term Assets Other long-term assets included: Schedule of Other Long Term Assets March 31, 2025 December 31, 2024 SAFE agreement $ 250,000 $ 250,000 Security deposits 113,054 59,823 Total $ 363,054 $ 309,823 In November 2022, the Company entered into a SAFE (Simple Agreement for Future Equity) agreement with Firestorm Labs, Inc. (“Firestorm”) under which it made a payment of $ 250,000 to Firestorm in exchange for the right to certain shares of Firestorm stock. The SAFE permits the Company to participate in a future equity financing of Firestorm by converting the $ 250,000 into shares of Preferred Stock of Firestorm. If there is a change in control of Firestorm or a public offering of shares of its stock, then the Company shall have the right to receive cash payments, or shares of stock, whichever has greater value. The Company’s investment in the SAFE agreement has been recorded on the cost method of accounting. The Company evaluates the investment for any indications of impairment in value on a quarterly basis. No factors indicative of impairment were identified during the three months ended March 31, 2025. 16 Note 10 – Right of Use Assets and Liabilities As of March 31, 2025, the Company had operating type leases for real estate and no finance type leases. The Company’s leases have remaining lease terms of up to 5.75 years, including options to extend certain leases for up to six years . Operating lease expense totaled $ 145,111 and $ 88,982 for the three months ended March 31, 2025 and 2024, respectively. Leases on which the Company made rent payments during the reporting period included: Schedule of Leases Rent Payments Location Monthly Rent Expiration South Salt Lake, Utah $ 24,040 December 2030 Santa Monica, California $ 16,697 June 2025 San Juan, Puerto Rico $ 6,186 June 2027 Grantsville, Utah $ 1,250 December 2026 Carson, California $ 22,655 April 2028 South Salt Lake, Utah $ 1,642 January 2027 Supplemental information related to operating leases for the three months ended March 31, 2025 was: Schedule of Operating Leases Supplemental Information Operating cash paid for leased facilities $ 170,504 Weighted average remaining lease term (in years) 4.42 Weighted average discount rate 12 % Note 11 – Debt Obligations A. Decathlon Capital On August 31, 2021, Teal entered into an Amended and Restated Loan and Security Agreement with Decathlon Alpha IV, L.P. (“DA4”) in the amount of $ 1,670,294 (the “Loan”), representing the outstanding principal amount previously due and owing by Teal to DA4. Interest on the Loan accrued at a rate of ten ( 10 %) percent per annum. Principal and interest were payable in monthly installments of $ 49,275 . The balance was paid off in September 2024. B. Pelion Note In May 2021, Teal entered into a note agreement totaling $ 350,000 which is payable upon demand. The Note bears interest at the applicable Federal Rate as of the date of the Note which was 0.13 % on the date of issuance. Accrued interest at March 31, 2025 and December 31, 2024 totaled $ 1,751 and $ 1,639 , respectively. C. Corporate Equity Beginning in October 2021, and amended in January 2022, Teal financed a total of $ 120,000 of leasehold improvements with Corporate Equity, LLC. The loan bore interest at 8.25 % annually and required monthly payments of $ 3,595 . The balance was paid off in December 2024. 17 D. Ascentium Capital In September 2021, Teal entered into a financing agreement with Ascentium Capital to fund the purchase of a fixed asset totaling $ 24,383 with monthly payments of $ 656 . The balance was paid off in October 2024. E. Summary Future annual principal payments at March 31, 2025 were as follows: Schedule of Debt Payments Due Fiscal Year Ended: 2025 350,000 Thereafter — Total $ 350,000 Note 12 – Convertible Notes Payable In September 2024, the Company entered into a Securities Purchase Agreement (the “September 2024 SPA”) with Lind Global Asset Management X LLC (“Lind”). Under the September 2024 SPA, the Company received approximately $ 8,000,000 in funding from Lind in exchange for a Senior Secured Convertible Promissory Note in the amount of $ 9,600,000 (the “September 2024 Note”) and a Common Stock Purchase Warrant for the purchase of 750,000 shares of our common stock at a price of $ 6.50 per share, exercisable for five years (the “September 2024 Warrant”). The September 2024 Note was secured by substantially all assets of the Company. As additional consideration to Lind, the Company paid a commitment fee in the amount of $ 280,000 . The September 2024 Note, which did not accrue interest, would have been repaid in eighteen consecutive monthly installments in the amount of $ 533,334 beginning six months from the issuance date. At the Company’s option, monthly payments could have been increased up to $1,000,000 so long as the Company’s market capitalization was at least $50 million. In addition, if the Repayment Share Price (as defined below) was equal to or greater than $2.00, Lind could have at its option, increased the monthly payment amount up to $1,300,000 for up to two months. The monthly payments due under the September 2024 Note could have been made by the issuance of common stock valued at the Repayment Share Price, cash in an amount equal to 1.025 times the required payment amount, or a combination thereof. The Repayment Share Price was defined in the September 2024 Note as ninety percent of the average of the five consecutive lowest daily VWAPs for our common stock during the twenty trading days prior to the payment date, subject to a floor price of $0.75 per share. The fair value of the convertible note and related warrants were estimated using a Monte Carlo simulation model. No value was assigned to the warrant liability due to the fair market value of the convertible note payable being in excess of the proceeds received. In December 2024, Lind converted the entire $ 9,600,000 note payable into 1,476,923 shares of Common Stock at a conversion price of $ 6.50 per share. In November 2024, the Company entered into a First Amendment (the “November 2024 SPA Amendment”) to the September 2024 SPA with Lind. The November 2024 SPA Amendment amends the terms of the original Securities Purchase Agreement with Lind. Upon closing of the November 2024 SPA Amendment, the Company received approximately $ 6,000,000 in funding from Lind in exchange for issuance of a Senior Secured Convertible Promissory Note in the amount of $ 7,200,000 (the “November 2024 Note”) and a Common Stock Purchase Warrant for the purchase of 326,000 shares of Common Stock at a price of $ 9.20 per share, exercisable for 5 years (the “November 2024 Warrant”). As additional consideration to Lind, the Company paid a commitment fee in the amount of $ 210,000 . The November 2024 Note, which did not accrue interest, would have been repaid in eighteen consecutive monthly installments in the amount of $ 400,000 beginning six months from the issuance date. At our option, monthly payments could have been increased up to $750,000 so long as our market capitalization was at least $50 million. In addition, if the Repayment Share Price was equal to or greater than $2.00, Lind could have at its option, increased the monthly payment amount up to $975,000 for up to two months. The monthly payments due under the November 2024 Note could have been made by the issuance of common stock valued at the Repayment Share Price, cash in an amount equal to 1.025 times the required payment amount, or a combination thereof. The Repayment Share Price was defined in the November 2024 Note as ninety percent of the average of the five consecutive lowest daily VWAPs for our common stock during the twenty trading days prior to the payment date, subject to a floor price of $0.75 per share. The fair value of the convertible note and related warrants were estimated using a Monte Carlo simulation model. No value was assigned to the warrant liability due to the fair market value of the convertible note payable being in excess of the proceeds received. In December 2024, Lind converted the entire $ 7,200,000 note payable into 782,607 shares of Common Stock at a conversion price of $ 9.20 per share. 18 In February 2025, the Company entered into another SPA (the “February 2025 SPA”) with Lind. Under the February 2025 SPA, the Company received approximately $ 15,000,000 in funding from Lind in exchange for a Senior Convertible Promissory Note in the amount of $ 16,500,000 (the “February 2025 Note”) and a Common Stock Purchase Warrant for the purchase of 1,000,000 shares of our common stock at a price of $ 15.00 per share, exercisable for five years (the “February 2025 Warrant”). The February 2025 Note is secured by substantially all assets of the Company. As additional consideration to Lind, the Company paid a commitment fee in the amount of $ 525,000 . The February 2025 Note, which does not accrue interest, is due in twelve consecutive monthly installments in the amount of $ 1,650,000 beginning two months from the issuance date. At the Company’s option, monthly payments could be increased up to $5,000,000 so long as the Company’s market capitalization is at least $400 million. In addition, Lind could, at its option, increase the monthly payment amount up to $5,000,000 so long as the Company’s market capitalization is at least $400 million. The monthly payments due under the February 2025 Note can be made by the issuance of common stock valued at the Repayment Share Price, cash in an amount equal to 1.025 times the required payment amount, or a combination thereof. The Repayment Share Price is defined in the February 2025 Note as ninety percent of the average of the five consecutive lowest daily VWAPs for our common stock during the twenty trading days prior to the payment date. The fair value of the convertible note and related warrants were estimated using a Monte Carlo simulation model. No value was assigned to the warrant liability due to the fair market value of the convertible note payable being in excess of the proceeds received. See Note 2 for further information. In the event the Company issues or sells additional shares of common stock at an effective price per share that is less than the conversion price of the February 2025 Note as amended, the conversion price upon each such issuance will be reduced to a price equal to the consideration per share paid for additional shares of common stock. Additionally, in the event the Company issues or sells additional shares of common stock at an effective price per share that is less than the exercise price of the February 2025 Warrant as amended, the exercise price upon each such issuance will be reduced to a price equal to the consideration per share paid for additional shares of common stock. The Company’s convertible notes payable balance at March 31, 2025 was $ 25,132,556 . Subsequent to the quarter end, in April 2025, the Company entered into the First and Second Amendments to the February 2025 SPA with Lind. See Note 19 for further information. Note 13 – Common Stock Our common stock has a par value of $ 0.001 per share. We are authorized to issue 500,000,000 shares of common stock. Each share of common stock is entitled to one vote. A summary of shares of common stock issued by the Company since December 31, 2024 is as follows: Schedule of Common Stock Outstanding Description of Shares Shares Issued Shares outstanding as of December 31, 2024 85,215,136 Shares outstanding, balance 85,215,136 Exercise of stock options 488,969 Exercise of warrants 49,843 Retirement of common shares ( 106,330 ) Shares outstanding as of March 31, 2025 85,647,618 Shares outstanding, balance 85,647,618 In February 2025, the Company retired 106,330 shares of common stock that were previously held in escrow for payment as consideration for the Teal acquisition. Subsequent to the acquisition’s modification period and prior to the settlement of escrowed shares, the Company paid cash for certain seller responsible expenditures which were then settled through the refund of these escrowed shares. This was treated as an equity transaction and goodwill was not affected. Public Offering Subsequent to quarter end, in April 2025, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company agreed to issue and sell, in a registered direct offering. See Note 19 for further information. Note 14 – Preferred Stock Our preferred stock has a par value of $ 0.001 per share. Series B Preferred Stock (“Series B Stock”) is convertible into common stock at a ratio of 0.8334 shares of common stock for each share of Series B Stock held and votes together with the common stock on an as-if-converted basis. 982,000 shares of Series B Stock were converted into 818,334 shares of common stock in June 2023. Shares outstanding at March 31, 2025 totaled 4,676 which are convertible into 3,896 shares of common stock. 19 Note 15 – Warrants In October 2020, the Company issued warrants to purchase 399,998 shares of common stock in connection with a convertible note financing with an initial fair value of $ 267,999 . The warrants have a five-year 5 term and an exercise price of $ 1.50 . In January 2021, the Company issued warrants to purchase 675,000 shares of common stock in connection with a convertible note financing with an initial fair value of $ 2,870,666 . The warrants have a five-year 5 term and an exercise price of $ 1.50 . In May 2021, the Company issued warrants to purchase 200,000 shares of common stock to the placement agent of its common stock offering. The warrants have a five-year 5 term and an exercise price of $ 5.00 . In July 2021, the Company issued warrants to purchase 533,333 shares of common stock to the placement agent of its common stock offering. The warrants have a five-year 5 term and an exercise price of $ 5.625 . In December 2023, the Company issued warrants to purchase 736,000 shares of common stock to the placement agent of its common stock offering. The warrants have a five-year 5 term and an exercise price of $ 0.625 . In September 2024, the Company issued warrants to purchase 750,000 shares of common stock to Lind, as further described in Note 12. The warrants have a five-year 5 term and an exercise price of $ 6.50 . No value was assigned to the warrants under the Monte Carlo simulation model due to the fair market value of the convertible note payable being in excess of the proceeds received. In November 2024, the Company issued warrants to purchase 326,000 shares of common stock to Lind, as further described in Note 12. The warrants have a five-year 5 term and an exercise price of $ 9.20 . No value was assigned to the warrants under the Monte Carlo simulation model due to the fair market value of the convertible note payable being in excess of the proceeds received. In February 2025, the Company issued warrants to purchase 1,000,000 shares of common stock to Lind, as further described in Note 12. The warrants have a five-year 5 term and an exercise price of $ 15.00 which was amended to $ 7.52 on the First Amendment to the agreement on April 9, 2025. See Note 19 for further information. No value was assigned to the warrants under the Monte Carlo simulation model due to the fair market value of the convertible note payable being in excess of the proceeds received. The following table summarizes the changes in warrants outstanding since December 31, 2024. Schedule of Changes in Warrants Outstanding Number of Shares Weighted-average Exercise Price per Share Weighted-average Remaining Contractual Term (in years) Aggregate Intrinsic Value Outstanding at December 31, 2024 914,056 $ 4.76 2.40 $ 7,397,542 Granted 1,000,000 7.62 4.87 — Exercised ( 82,623 ) 5.45 — — Outstanding at March 31, 2025 1,831,433 $ 6.29 3.68 $ 2,073,198 20 Note 16 – Share Based Awards The 2019 Equity Incentive Plan (the “2019 Plan”) and the 2024 Omnibus Equity Incentive Plan (the “2024 Plan”) (collectively, the “Plans”) allow us to incentivize key employees, consultants, and directors with long term compensation awards such as stock options, restricted stock, and restricted stock units (collectively, the “Awards”). The number of shares issuable in connection with Awards under the 2019 Plan were not to exceed 11,750,000 . However, no shares are issuable under the 2019 Plan after the 2024 Plan became effective on October 15, 2024. The number of shares issuable in connection with Awards under the 2024 Plan may not exceed 11,250,000 plus any underlying forfeited 2019 Plan awards. A. Options The range of assumptions used to calculate the fair value of options granted during the three months ended March 31, 2025 was: Schedule of Assumptions Used to Calculate the Fair Value of Options Granted Exercise Price $ 8.56 – 8.56 Stock price on date of grant 8.46 – 8.46 Risk-free interest rate 4.44 – 4.44 % Dividend yield — Expected term (years) 5.97 – 5.97 Volatility 191.15 – 191.15 % A summary of options activity under the Plan since December 31, 2024 was: Schedule of Options Activity Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding as of December 31, 2024 5,645,325 1.54 7.90 59,779,836 Granted 402,500 8.56 Exercised ( 908,503 ) 1.28 Forfeited or expired ( 127,502 ) 1.73 Outstanding as of March 31, 2025 5,011,820 2.06 1.99 20,221,803 Exercisable as of March 31, 2025 1,633,529 $ 1.47 1.35 $ 7,200,542 The aggregate intrinsic value of outstanding options represents the excess of the stock price at the indicated date over the exercise price of each option. As of March 31, 2025, there was $ 6,622,720 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.49 years. As of December 31, 2024, there was $ 4,068,622 of unrecognized stock-based compensation expense related to unvested stock options which is expected to be recognized over the weighted average periods of 1.25 years. 21 B. Restricted Stock A summary of restricted stock activity under the Plan since December 31, 2024 was: Schedule of Restricted Stock Activity Shares Weighted Average Grant-Date Fair Value Per Share Unvested and outstanding as of December 31, 2024 1,544,027 $ 3.84 Granted 50,000 4.94 Vested — — Forfeited ( 321,428 ) 0.89 Unvested and outstanding as of March 31, 2025 1,272,599 $ 4.64 As of March 31, 2025, there was $ 4,497,389 of unrecognized stock-based compensation expense related to unvested restricted stock units which is expected to be recognized over the weighted average periods of 1.13 years. As of December 31, 2024, $ 5,328,970 of unrecognized stock-based compensation expense related to unvested restricted stock units which is expected to be recognized over the weighted average periods of 1.25 years. C. Stock Compensation Stock compensation expense for the three months ended March 31 by functional operating expense was: Schedule of Stock Compensation Expense by Functional Operating Expense 2025 2024 Research and development $ 174,460 $ 115,477 Sales and marketing 862,983 85,205 General and administrative 561,529 604,952 Total $ 1,598,972 $ 805,634 Stock compensation expense pertaining to options totaled $ 804,855 for the three months ended March 31, 2025. Stock compensation expense pertaining to restricted stock totaled $ 794,117 for the three months ended March 31, 2025. Stock compensation expense pertaining to options totaled $ 708,726 for the three months ended March 31, 2024. Stock compensation expense pertaining to restricted stock totaled $ 96,908 for the three months ended March 31, 2024. Note 17 - Related-Party Transactions In February 2024, the Company sold Rotor Riot and Fat Shark to Unusual Machines, as further described in Note 4 and Note 7. UMAC’s Chief Executive Officer is a direct relative of a former member of the Company’s management. Note 18 – Commitments and Contingencies Legal Proceedings In the ordinary course of business, we may be involved, at times, in various legal proceedings involving a variety of matters. We do not believe there are any pending legal proceedings that will have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows. However, the outcome of such legal matters is inherently unpredictable and subject to significant uncertainties. We have not recorded any litigation reserves as of March 31, 2025. One pending legal matter is an action filed against Teal in a U.S. District Court in Delaware. The complaint asserts claims for breach of contract which management denies. We are asserting vigorous defenses to the complaint. Additionally, the Company has filed a lawsuit against the complainant for Tortious Interference with Contractual Relations and Prospective Contractual Relations. No discovery or other significant developments in the lawsuit have occurred. 22 Note 19 – Subsequent Events Subsequent events have been evaluated through the date of this filing and there are no subsequent events which require disclosure, except as follows: First Amendment to Lind SPA On April 9, 2025, the Company entered into a First Amendment (the “April 9, 2025 Amendment”) to the terms of the February 2025 Note and February 2025 Warrant. Pursuant to the February 2025 SPA, the Company received $ 15 million in funding from Lind in exchange for issuance to Lind of a Senior Secured Convertible Promissory Note in the amount of $ 16,500,000 and a Common Stock Purchase Warrant for the purchase of 1,000,000 shares of our common stock at a price of $ 15.00 per share, exercisable for 5 years. The February 2025 Note and the February 2025 SPA contained certain covenants, including: (i) in the event of new issuances of our common stock at a price less than the Conversion Price then in effect, the Conversion Price will be adjusted to the price paid for the newly issued shares of common stock (the “Price Reset Provision”); (ii) in the event the Company issues new securities in exchange for gross proceeds of greater than $ 15 million, the Company is required to pay the lower of 20% of the proceeds of such offering, or 20% of the balance of the February 2025 Note, toward repayment of the February 2025 Note (the “Offering Proceeds Provision”); and (iii) in the event the Company undertakes a new offering of securities, Lind has the right to purchase up to 20% of the securities issued in the new offering (the “Participation Rights”). The Warrant contained provisions that would adjust the exercise price of the Warrant in certain circumstances, including if the Company issued new securities at a price less than the then-current exercise price. Under the original terms of the February 2025 Note, (i) the balance of the February 2025 Note was due and payable on February 10, 2026; (ii) the amount due under the February 2025 Note was convertible by Lind from time to time at a price equal to the lower of “Conversion Price” of $ 16.15 per share, or the “Repayment Share Price,” which is defined as ninety percent ( 90 %) of the average of the five (5) lowest daily VWAPs for our common stock during the twenty ( 20 ) trading days prior to the conversion date, subject to a floor price; (iii) conversions under the February 2025 Note are limited to a maximum of $ 1,650,000 in any calendar month, subject to increase upon our optional written consent; and (iv) upon receipt of a conversion notice under the February 2025 Note, the Company could, if the applicable Repayment Share Price is below the Conversion Price, elect to pay the conversion amount, plus a 2.5 % premium, in cash and in lieu of issuing common stock. Under the April 9, 2025 Amendment, and in exchange for a waiver of Price Reset Provision and certain other covenants, the terms of the February 2025 Note, Warrant and the SPA were amended. The balance of the February 2025 Note was increased to $ 18,150,000 . The Conversion Price of the February 2025 Note was lowered to $ 9.52 per share. T he exercise price for the Warrant was lowered to $ 7.62 per share. The maturity date of the February 2025 Note was extended to May 10, 2026. Upon receipt of a conversion notice under the February 2025 Note, the Company may, if the applicable Repayment Share Price is below the Conversion Price, elect to pay up to fifty percent of the conversion amount, plus a 2.5 % premium, in cash and in lieu of issuing common stock. The Price Reset Provision, the Offering Proceeds Provision, and the Participation Rights were waived for a limited time, until April 17, 2025. 23 Second Amendment to Lind SPA On April 10, 2025, the Company entered into a Second Amendment to Senior Secured Convertible Promissory Note and Warrant Issued February 10, 2025 with Lind; (ii) First Amendment to Warrant Issued November 26, 2024 between the Company and Lind and (iii) First Amendment to Securities Purchase Agreement dated February 10, 2025 (collectively, the “Agreement”). The Agreement amended that certain: (A) Senior Secured Convertible Promissory Note in the principal amount of $ 16,500,000 , dated February 10, 2025 and amended on April 9, 2025 (the “Promissory Note”), by and between the Company, and Lind; (B) Common Stock Purchase Warrant to purchase up to 1,000,000 shares of the Company’s common stock, issued from the Company to Lind on February 10, 2025, as amended on April 9, 2025 (the “February 2025 Warrant”); (C) Common Stock Purchase Warrant to purchase up to 326,000 shares of the Company’s common stock, issued from the Company to Lind on November 26, 2024 (the “November 2024 Warrant”) and (D) Securities Purchase Agreement dated February 10, 2025 (the “Purchase Agreement”). The Note and February 2025 Warrant were issued pursuant to that the Purchase Agreement. Under the terms of the Agreement, the Company and Lind amended each of the Promissory Note, the February 2025 Warrant and the November 2024 Warrant to include a cap on the amount of shares issuable upon conversion and/or exercise of each aforementioned security such that the shares issuable under each of them shall not exceed the maximum number of shares of Common Stock which may be issued by the Company in the absence of shareholder approval as provided by Nasdaq Rule 5635(d). In addition, Section 5.13 of the Purchase Agreement was amended to extend the deadline for to obtain Stockholder Approval (as defined in the Purchase Agreement) to June 30, 2025. In addition, certain stockholders of the Company entered into support agreements under which they agreed to vote in favor of the matter presented to the Company’s stockholders for the Stockholder Approval. Notes Payable Conversions On April 15, 2025, the Company redeemed $ 1,650,000 of notes payable for a cash payment of $ 1,691,250 . On May 1, 2025, Lind converted $ 1,650,000 of notes payable into 372,460 shares of Common Stock at a conversion price of $ 4.43 per share. Public Offering On April 10, 2025, the Company entered into a securities purchase agreement with certain institutional investors pursuant to which the Company agreed to issue and sell, in a registered direct offering (the “Registered Direct Offering”), an aggregate of 4,724,412 shares of the Company’s common stock, par value $ 0.001 per share, at a price of $ 6.35 per share. The gross proceeds to the Company from the Registered Direct Offering were approximately $ 30 million, before deducting the placement agents’ fees and other offering expenses payable by the Company. 24 ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Transition Report on Form 10-KT for the Transition Period ended December 31, 2024 as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted. Overview We are a drone technology company integrating robotic hardware and software for military, government and commercial operations. We were originally incorporated under the laws of the State of Colorado in 1984 under the name “Oravest International, Inc.” In November 2016, we changed our name to “TimefireVR, Inc.” and re-incorporated in Nevada. In May 2019, we completed a share exchange agreement with Propware which resulted in the Propware shareholders acquiring an 83% ownership interest, and management control, of the Company. In connection with the share exchange agreement, we changed our name to “Red Cat Holdings, Inc.”, and our operating focus to the drone industry. Prior to the share exchange agreement, Propware was focused on the research and development of software solutions that could provide secure cloud-based analytics, storage and services for the drone industry. Following the share exchange agreement and name change, we have completed a series of acquisitions and financings which have broadened the scope of our activities in the drone industry. Recent Developments In April 2025, we entered into the First and Second Amendments to the February 2025 SPA with Lind. Additionally, in April 2025, we entered into a securities purchase agreement with certain institutional investors pursuant to which we agreed to issue and sell, in a registered direct offering. See Note 19 for further information. Plan of Operations Since April 2016, the Company’s primary business has been to provide products, services, and solutions to the drone industry which it presently does through its wholly owned consolidated subsidiaries. Beginning in January 2020, the Company expanded the scope of its drone products and services through five acquisitions, including: A. In January 2020, we acquired Rotor Riot, a reseller of drones and related parts, primarily to the consumer marketplace through its digital storefront located at www.rotorriot.com. The total purchase price was $2.0 million. Rotor Riot was sold in February 2024 to Unusual Machines. B. In November 2020, we acquired Fat Shark which sells consumer electronics products to the first-person view sector of the drone industry. Fat Shark’s flagship products are headsets with a built-in display that allow a pilot to see a real-time video feed from a camera typically mounted on an aerial platform or drone. The total purchase price was $8.4 million. Fat Shark was sold in February 2024 to Unusual Machines. C. In May 2021, we acquired Skypersonic, a provider of drone products and software solutions that enable drone inspection flights that can be executed by pilots anywhere in the world. Skypersonic powers drones to “Fly Anywhere” and “Inspect the Impossible”. Its patented software and hardware solutions allow for inspection services in restricted spaces where GPS is denied or unavailable. The total purchase price was $2.8 million. Skypersonic’s technology has been redirected to military applications and its operations consolidated into Teal. D. In August 2021, we acquired Teal, a leader in providing sophisticated and complex unmanned aerial vehicle technology, primarily drones, to government and commercial enterprises, most notably, the military. Teal manufactures drones approved by the U.S. Department of Defense for reconnaissance, public safety, and inspection applications. The total purchase price was $10.0 million. E. In September 2024, we acquired FlightWave Aerospace Systems Corporation, an industry-leading provider of VTOL drone, sensor and software solutions, under an Asset Purchase Agreement. As part of the acquisition, we created a new subsidiary, FW Acquisition Inc. for ongoing operations. The total purchase price was $14.0 million. 25 Discussion and Analysis of the Three Months Ended March 31, 2025 Compared to the Three Months Ended March 31, 2024 Revenues Consolidated revenues totaled $1,629,662 during the three months ended March 31, 2025 (or the “2025 period”) compared to $6,614,029 during the three months ended March 31, 2024 (or the “2024 period”) representing a decrease of $4,984,367, or 75%. The decrease related to lower product revenue as the Company has begun shifting manufacturing focus from the Teal 2 to the Black Widow. Gross Profit Consolidated gross loss totaled $850,410 during the 2025 period compared to a gross profit of $1,121,204 during the 2024 period representing a decrease of $1,971,614, or 176%. On a percentage basis, gross loss was 52% during the 2025 period compared to a gross profit of 17% during the 2024 period. The gross loss in the 2025 period was due to lower-than-planned manufacturing levels due to the transition to the Black Widow which resulted in higher relative overhead costs compared to the 2024 period. Our manufacturing facility is presently producing drones at a lower level than it is designed for, and these lower production levels, combined with higher overhead costs, continue to result in lower than targeted gross margins. Operating Expenses Research and development expenses totaled $3,432,593 during the 2025 period compared to $2,669,502 during the 2024 period, representing an increase of $763,091, or 29%. The increase was primarily due to a higher headcount, including the addition of employees from the FlightWave acquisition. Sales and marketing costs totaled $3,314,748 during the 2025 period compared to $1,410,506 during the 2024 period, representing an increase of $1,904,242 or 135%. The increase was driven by higher payroll expenses due to an increased headcount and an increase in tradeshow attendance in efforts to spread awareness of new products and the Red Cat Futures Initiative. General and administrative expenses totaled $4,880,448 during the 2025 period compared to $3,084,495 during the 2024 period, representing an increase of $1,795,953 or 58%. The increase was mainly due to a higher headcount, including the addition of employees from the FlightWave acquisition. In anticipation of winning the production contract under the Army’s Short Range Reconnaissance program of record, the Company increased investment in personnel necessary to fulfill the contract as well as anticipated demands for future products. During the 2025 period, we incurred stock-based compensation costs of $1,598,972 compared to $805,634 in the 2024 period, resulting in an increase of $793,338 or 98%. Other Income Other expense totaled $10,645,152 during the 2025 period compared to other income of $635,676 during the 2024 period, representing an increase of $11,280,828 or more than 17 times. This increase is primarily related to a loss of $10,699,677 recognized in the 2025 period on the February 2025 Note to Lind, based on its fair value. Net Loss from Continuing Operations Net loss from continuing operations totaled $23,123,351 for the 2025 period compared to $5,407,623 for the 2024 period, resulting in an increase of $17,715,728 or 328%. 26 Cash Flows Operating Activities Net cash used in operating activities was $15,907,737 during the 2025 period compared to net cash used in operating activities of $4,375,260 during the 2024 period, representing an increase of $11,532,477 or 264%. The increased use of cash primarily related to lower gross profit and higher cash based operating expenses compared to the 2024 period. Net cash used in operations, net of non-cash expenses, totaled $12,886,204 during the 2025 period, compared to $1,129,679 during the 2024 period, resulting in an increase of $11,756,525, or more than 10 times. Net cash used related to changes in operating assets and liabilities totaled $5,670,590 during the 2025 period, compared to $97,316 during the 2024 period, representing an increase of $5,573,274. Changes in operating assets and liabilities can fluctuate significantly from period to period depending upon the timing and level of multiple factors, including inventory purchases, vendor payments, and customer collections. Investing Activities Net cash used by investing activities was $273,103 during the 2025 period compared to net cash provided by investing activities of $924,009 during the 2024 period, resulting in a decrease of $1,197,112 or 130%. During the 2025 period, proceeds from the divestiture of the consumer segment was $0 compared to $1,000,000 during the 2024 period. Financing Activities Net cash provided by financing activities totaled $14,748,953 during the 2025 period compared to net cash used in financing activities of $147,147 during the 2024 period. The increase related to the proceeds from the issuance of convertible notes payable during the 2025 period. Liquidity and Capital Resources At March 31, 2025, we reported current assets totaling $29,412,488, current liabilities totaling $28,906,372 and net working capital of $506,116. Cash totaled $7,722,410 at March 31, 2025. Inventory related balances, including pre-paid inventory, totaled $17,107,860. Going Concern We have never been profitable and have incurred net losses related to acquisitions, as well as costs incurred to pursue our long-term growth strategy. During the three months ended March 31, 2025, we incurred a net loss of $23,123,351 and used cash in operating activities of $15,907,737. As of March 31, 2025, working capital totaled $506,116. These financial results and our financial position at March 31, 2025 raise substantial doubt about our ability to continue as a going concern. We have recently taken actions to strengthen its liquidity through additional financings. Additionally, in November 2024, we were selected as the winner of the U.S. Army’s Short Range Reconnaissance (SRR) Program of Record which we are currently in negotiations regarding the initial purchase. We are currently in the process of scaling our production manufacturing facility in order to increase revenue and improve gross margins in hopes to increase cash flows from operations. As described in Note 12, we closed financings with proceeds of $7,681,000, $5,775,000, $14,432,880 in September 2024, November 2024, and February 2025, respectively. Additionally, our Form S-3 became effective on December 11, 2024 and as described in Note 19, on April 10, 2025, we raised an additional $30 million. Management has concluded that these recent positive developments alleviate any substantial doubt about our ability to continue our operations, and meet our financial obligations, for twelve months from the date these consolidated financial statements are issued. Critical Accounting Policies and Estimates Our financial statements and accompanying notes have been prepared in accordance with GAAP applied on a consistent basis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management. 27 Significant estimates reflected in these financial statements include those used to (i) complete purchase price accounting for acquisitions, (ii) evaluate long-term assets, including goodwill, for impairment, (iii) evaluate inventory reserves for excess and obsolescence and (iv) determine valuations of convertible notes payable and warrants. Purchase Price Accounting – We record our acquisitions under the acquisition method of accounting, under which most of the assets acquired and liabilities assumed are initially recorded at their respective fair values and any excess purchase price is reflected as goodwill. We utilize management estimates and, in some instances, independent third-party valuation firms to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration, if any. Such estimates and valuations require us to make significant assumptions, including projections of future events and operating performance. The fair value of brand name, backlog, customer relationships and proprietary technology acquired in our acquisitions are determined using various valuation methods, based on a number of significant assumptions. We determine which assets have finite lives and then determine the estimated useful life of finite assets. The carrying value of brand name is not being amortized but is reviewed quarterly and formally evaluated at year end for impairment. Backlog, customer relationships and proprietary technology are being amortized over seven years. The estimated fair values are subject to change during the measurement period, which is limited to one year subsequent to the acquisition date. Goodwill and Long-lived Assets – Goodwill represents the future economic benefit arising from other assets acquired in an acquisition that are not individually identified and separately recognized. We test goodwill for impairment in accordance with the provisions of ASC 350, Intangibles – Goodwill and Other, (“ASC 350”). Goodwill is tested for impairment at least annually at the reporting unit level or whenever events or changes in circumstances indicate that goodwill might be impaired. ASC 350 provides that an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then additional impairment testing is not required. However, if an entity concludes otherwise, then it is required to perform an impairment test. The impairment test involves comparing the estimated fair value of a reporting unit with its book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired. If, however, the fair value of the reporting unit is less than book value, then an impairment loss is recognized in an amount equal to the amount that the book value of the reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The estimate of fair value of a reporting unit is computed using either an income approach, a market approach, or a combination of both. Under the income approach, we utilize the discounted cash flow method to estimate the fair value of a reporting unit. Significant assumptions inherent in estimating the fair values include the estimated future cash flows, growth assumptions for future revenues (including gross profit, operating expenses, and capital expenditures), and a rate used to discount estimated future cash flow projections to their present value based on estimated weighted average cost of capital (i.e., the selected discount rate). Our assumptions are based on historical data, supplemented by current and anticipated market conditions, estimated growth rates, and management’s plans. Under the market approach, fair value is derived from metrics of publicly traded companies or historically completed transactions of comparable businesses. The selection of comparable businesses is based on the markets in which the reporting units operate and consider risk profiles, size, geography, and diversity of products and services. Inventories – We measure inventory at the lower of cost or net realizable value considering judgments and estimates related to future customer demand and other market conditions. Although we believe these estimates are reasonable, any significant changes in customer demand that are less favorable than our previous estimates may require additional inventory write-downs and would be reflected in cost of sales resulting in a negative impact to our gross margin in that period. 28 Convertible Notes Payable –We measure convertible notes payable at fair value based on significant inputs not observable in the market, which causes them to be classified as Level 3 measurements within the fair value hierarchy. Changes in the fair value of the convertible notes payable relate to updated assumptions and estimates are recognized as a convertible notes payable fair value adjustment within the consolidated statements of operations and comprehensive loss. In determining the fair value of the convertible notes payable, we use a market-based approach. The valuation method utilizes a negotiated discount rate and a market yield rate which are unobservable inputs. An increase or decrease in any of the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value. Warrants – The fair value of the warrants issued is estimated using a Monte Carlo simulation model. The significant unobservable inputs for the Monte Carlo model include the stock price, exercise price, risk-free rate of return, time to expiration, and the volatility. An increase or decrease in the unobservable inputs in isolation could result in a material increase or decrease in the estimated fair value. In the future, depending on the weight of evidence and valuation approaches used, these or other inputs may have a more significant impact on the estimated fair value. Recently Issued Accounting Pronouncements We have implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and we do not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are not required to provide the information required by this Item as we are a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act. ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our principal executive officer and principal financial officer evaluated the effectiveness of our “disclosure controls and procedures” as of March 31, 2025, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures as of March 31, 2025, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective, specifically pertaining to the disclosed and restated financials noted in our report on internal control over financial reporting below. 29 Management’s quarterly report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of our consolidated financial statements in accordance with GAAP. Our accounting policies and internal controls over financial reporting, established and maintained by management, are under the general oversight of the Board’s audit committee. Our internal control over financial reporting includes those policies and procedures that: ● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; ● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and ● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate. Management assessed our internal control over financial reporting as of March 31, 2025. The standard measures adopted by management in making its evaluation are the measures in the Internal-Control Integrated Framework published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on management’s assessment using the COSO criteria, our CEO and CFO concluded that our internal control over financial reporting was not effective as of March 31, 2025, which was identified during the year ended April 30, 2023 and continues through March 31, 2025. Our size has prevented us from being able to employ sufficient resources to enable us to have an adequate level of supervision and segregation of duties. Therefore, management concluded that we did not have a comprehensive and formalized accounting and financial reporting policies and procedures manual which details the information needed for our financial reporting process and that we did not have a robust review process by which management could monitor for potential errors or technical accounting requirements, which have resulted in material weaknesses in internal control over financial reporting as of March 31, 2025. Management is reviewing internal control procedures and will work to implement enhanced procedures to address the identified material weakness. Changes In Controls Over Financial Reporting There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2025, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Limitations on Effectiveness of Controls and Procedures In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. 30 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS From time to time, we are involved in various legal proceedings, lawsuits and claims incidental to the conduct of our business, some of which may be material. There were no material changes to the disclosure made in the Company’s Transition Report on Form 10-KT for the year ended December 31, 2024 regarding these matters. ITEM 1A. RISK FACTORS Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Transition Report on Form 10-KT for the transition period ended December 31, 2024, as filed with the SEC on March 31, 2025 (“Transition Report”). There have been no material changes in our risk factors from those previously disclosed in our Transition Report. You should carefully consider the risks described in our Transition Report which could materially affect our business, financial condition or future results. The risks described in our Transition Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS From the inception of our 2024 Equity Incentive Plan through March 31, 2025, we issued an aggregate of 1,720,000 shares of common stock pursuant to compensatory grants of restricted stock units and stock options to employees and consultants, which issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act . Such restricted stock units generally vest annually, and such options vest annually. 31 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. MINE SAFETY DISCLOSURES Not applicable ITEM 5. OTHER INFORMATION Rule 10b5-1 Trading Plans During the three months ended March 31, 2025, none of our directors or officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.” ITEM 6. EXHIBITS Exhibit No. Description 3.1 Amended and Restated Bylaws adopted effective September 17, 2022 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on September 22, 2022). 10.1 Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on February 12, 2025) 10.2 Form of Senior Secured Convertible Promissory Note (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on February 12, 2025) 10.3 Common Stock Purchase Warrant (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on February 12, 2025) 10.4 Security Agreement (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed on February 12, 2025) 10.5 First Amendment to Senior Secured Convertible Promissory Note and Warrant (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on April 10, 2025) 10.6* Employment Letter for Christian Ericson, dated March 5, 2025 31.1* Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Principal Financial and Accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1** Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2** Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1* [Insider Trading Policy] 101.INS* Inline XBRL Instance Document 101.SCH* Inline XBRL Taxonomy Extension Schema Document 101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document 104* Cover Page Interactive Data File (embedded within the Inline XBRL document) * Filed herewith. **Furnished herewith. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RED CAT HOLDINGS, INC. Date: May 14, 2025 By: /s/ Jeffrey Thompson Jeffrey Thompson Chief Executive Officer (Principal Executive Officer) Date: May 14, 2025 By: /s/ Christian Ericson Christian Ericson Chief Financial Officer (Principal Financial and Accounting Officer) 33